Envision this: You've just made a forex trade on EUR/USD, and within minutes, you've gained a net $15. Your heart is pumping as you behold the green figures on your display. But then your mind meanders to the scary scenario of the market turning on you and your flipping those green numbers to red. So you make like a baby and walk away with your small win, your precious gain.
But then, in a nail-biting turn of events, you see the currency pair move in your favour for another 100 pips. What could have been a $150 profit is now a meagre $15 gain. Does this kind of close call with a substantial loss sound familiar?
You aren't by yourself. A recent talk in Reddit's trading community unveiled a bitter fact: "We all look like we're gambling from a short video like this." This feeling reverberates throughout the forex trading society, where often it's emotional decision-making that trumps strategic thinking.
The hard reality? One of the most profit-killing behaviours in forex trading is closing trades too early. It's not just about missing out on a few extra dollars. It's about systematically decimating your long-term profitability and turning strategies that could win into ones that don't. Closing trades too early is bad. Don't do it.
In this all-encompassing manual, we will expose the true expense of leaving too soon, dig into the deep-seated reasons for this harmful behaviour, and furnish you with five concrete, doable tactics that you can actually follow to let your profits run while controlling risk well enough that you sleep at night.
The Psychology Behind Premature Exits: Why Your Brain Works Against You
To grasp why traders invariably shut trades down too soon, one must look into the psychological forces that propel our decision-making. These aren't default features of our personalities—they're wired-in human responses that can be acknowledged and combated.
Fear of Giving Back Profits
As soon as you lay your eyes on the green on your screen, your brain treats those unrealized gains as cash in your possession. This phenomenon, identified by behavioral economist Daniel Kahneman as "loss aversion," is the intense fear of loss that leads people to hang onto stocks even when it seems foolish to do so. They would rather incur excessive trading costs, pay more taxes, and suffer substantial paper and real losses than sell at a loss and use the proceeds to buy more stimulating, fun-to-own stocks.
In short, when it comes to avoiding losses, we humans are pathetic. And when it comes to paper losses, we are really pathetic.
In the realm of psychology related to forex trading, this shows up as the seemingly irresistible desire to secure profits, even when your original analysis indicates to you that the trade has much more room to run. This sentiment was perfectly captured by one Reddit trader when he said, "We exit as soon as we see green. That's not a strategy—that's emotion."
Lack of Clear Exit Planning
The majority of traders devote ample time to scheming their entry points, yet they "wing it" when it comes to exits. Exiting a trade is often just as important (if not more so) than entering one. Without predetermining take-profit levels or a systematic approach to profit-taking, traders often allow emotions to dictate their actions in this regard. The result is a high percentage of traders making critical decisions on the very momentary feelings that many of us know (or should know) are prone to error.
Not having a plan means you've got a "style" of trading that is totally reactive. It amounts to having your every price movement provoke some kind of emotional reaction in you. Instead of following a forex exit strategy that's been planned and is therefore somewhat "set in stone," you're second-guessing yourself right to the point of decision-making that's not just inconsistent but almost guaranteed to be suboptimal.
Instant Gratification Addiction
Dopamine is released in response to visually rewarding images. Therefore, it is not too crass to think of trading as akin to a kind of striptease for the brain. But while the hormones and neurotransmitters that make trading and gambling feel good are doing their thing, there is something else to consider. Money can also buy happiness. Sheldon and his colleagues found that when people were given cash to spend, those who spent it on other people reported greater happiness than when they spent it on themselves. The reason, hypothesise the researchers, is that spending money on others satisfies the human social instinct.
Lack of Confidence in Analysis
When trust is lacking, traders tend to stumble or fall out. When understanding is incomplete, plans for the righting of the situation are improvised and put together on a partial basis. In both situations, the plans' performance is judged against the prior models' sorry lot, and the plans are rated low quality and unlucky. By contrast, plans made with understanding and trust tend to perform well, even when the traders have only a thin grasp of the situation.
The performance of plans tends to correlate with the level of understanding, trust, and emotional control the trader demonstrates. Having a trading plan that is understood and well-founded is clearly important for any trader. But it seems especially vital for the emotionally impaired trader. Most people are at some sort of handicap when it comes to trading and emotional control.
The True Cost of Premature Exits: What You're Really Missing
The impact of terminating trades prematurely extends well beyond the loss of specific profits. It gnaws at the very foundation of your trading performance, and what it is nibbling away at compounds and grows over time. It affects several different factors that we may not realize are connected.
Destroying Your Risk-Reward Ratio
Consider this scenario: You wager $50 for the chance to earn $15 on a trade. Your risk-reward ratio is 1:0.3. This means you have to win more than 75% of the time just to break even, and it is essentially impossible to do this in forex trades and almost any other kind of trading.
Take the same trade setup and let it run to +$150 instead of closing at +$15. Your risk-reward ratio is now 1:3, meaning you'd need to win just 25% of your trades to remain profitable. This one adjustment can turn a losing strategy into a winning one.
Forex trading can be profitable if it is not about counting the times when one is right or wrong but about counting the times one makes more money when one is right than when one is wrong. This simple truth puts us light-years ahead of most traders, who seem to not know this or not want to know this.
Missing Trend Profits
The forex market often trends for a long time, especially on high timeframes. When a trader closes a trade early, they are really quitting the most profitable part of a market move—the part where the trend keeps going.
A real, tangible case can tell us much more than theory. In 2023, the USD/JPY currency pair, for instance, was in a very lovely uptrend—moving in several months' time from 130 to 150.
Traders who took their profits too early, in this instance, and exited with modest gains, obviously missed out on a potential profit of thousands of pips. Yet, we would venture to say that those who used trailing stops and good position management in the upside part of this move rode the majority of the wave.
Weakening Long-Term Strategy Performance
Any forex trading plan that nets both small and large wins and one that weakens the statistical advantage of the plan, when it results in an early exit, is not a plan at all. It's what we call a scattershot. Trading plans that work reliably over time result in netting both small and large wins, with the big wins more than offsetting the losses we know are part of trading.
If you always make a point of terminating your winning trades early, you are not allowing the most profitable portion of your trading system to function. This system component, your winning trades, is what confers overall profitability on your trading system. If you aren't making a point of letting your winning trades run, you might as well not have a system at all.
Creating Emotional Trading Patterns
Boosting emotional decision-making makes it likely you will choose emotion over reason in the future. If you close a trade because you are afraid, not because of some well-reasoned strategy, every time you do it, you're boosting emotional decision-making. So, if you want to make more rational decisions, steer clear of this. Alternatively, if you want to make emotional decisions more often, favor this. But do not favor this. Favor what helps.
A sinful circle arises here that makes your trading more of an emotional prison and less of a systematic, hard-decision, enter-exit-stay-in-trade kind of work. When your trading is influenced by emotion, it is almost certainly not systematic; when it is not systematic, it is almost certain that it is losing.
When losing, many traders tend to resort to the use of all kinds of harmful emotional crutches. This is obviously a very bad habit to get into.
Five Proven Strategies to Avoid Premature Exits
Getting the trades closed too early requires making systematic decisions instead of making emotional ones. Here are five ways that have withstood the test of time that will let you manage risk well and cause you to allow your profitable trades to run.
Strategy 1: Master the Trailing Stop
Your best buddy in letting profits run while protecting gains is a trailing stop. Unlike fixed stop-losses, a trailing stop moves with the price, allowing you to capture more of a trend while giving you downside protection.
Here's a guide for you to put into action trailing stops the right way:
Initial Setup: Trailing stops shouldn't be put in too close to the price action or too far away.
Adjustment Method: Only move your stop into profit.
Distance Calculation: Use ATR to determine stop placement and adjustments.
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